Interim Report 2/2012: Hannover Re reports very good half-yearly result

Hannover, 10 August 2012:

Hannover Re expressed considerable satisfaction with its results as at 30 June 2012. "The first half-year was a pleasing one for our company overall," Chief Executive Officer Ulrich Wallin affirmed. "Both the operating profit and Group net income are significantly higher than the comparable figures for the previous year." Key drivers here were the markedly better results delivered by both business groups as well as investment income that was highly gratifying despite the challenging capital market climate.

Substantial premium growth in the first half of 2012

Gross written premium for the Hannover Re Group surged by an appreciable 14.0% to reach EUR 6.9 billion (EUR 6.0 billion) as at 30 June 2012. At constant exchange rates growth would have amounted to 9.6%. The level of retained premium retreated slightly to 89.8% (90.8%). Net premium earned climbed 13.1% to EUR 5.8 billion (EUR 5.1 billion), equivalent to growth of 8.8% adjusted for exchange rate effects.

The operating profit (EBIT) as at 30 June 2012 came in at a very pleasing EUR 597.2 million; in the corresponding period of the previous year EBIT had amounted to just EUR 248.9 million owing to the heavy burden of major losses. Group net income improved by a substantial 85.5% to EUR 405.3 million (EUR 218.5 million). Earnings per share amounted to EUR 3.36 (EUR 1.81).

Very pleasing result in non-life reinsurance

The situation on the international reinsurance markets was broadly positive for non-life business. "In the treaty renewals as at 1 April in Japan, Korea and the United States we actually achieved an even better outcome in some cases than in the round of renewals at the beginning of the year", Mr. Wallin commented. As anticipated, the rate increases for property catastrophe business were again appreciable owing to the natural disasters in 2011.

Gross premium in non-life reinsurance improved on the comparable period by 15.1% to reach EUR 4.1 billion (EUR 3.5 billion). At constant exchange rates, especially against the US dollar, growth would have come in at 11.3%. The level of retained premium was virtually unchanged at 90.2% (90.0%). Net premium earned climbed 16.0% to EUR 3.3 billion (EUR 2.8 billion); growth of 12.2% would have been recorded after adjustment for exchange rate effects.

The major loss situation for Hannover Re was again moderate in the second quarter. The total net expenditure as at 30 June 2012 of EUR 132.4 million (EUR 625.2 million) was well below the loss expectancy. The largest single events in the second quarter were the severe earthquakes on 20 and 29 May affecting a number of Italian provinces in the region of Emilia-Romagna, resulting in net loss expenditure of altogether around EUR 61 million for Hannover Re.

The underwriting result including interest on funds withheld closed at a pleasing EUR 105.3 million (-EUR 293.3 million). The resulting combined ratio for the first half-year improved markedly on the comparable period to reach 96.8% (110.3%). The operating profit (EBIT) in non-life reinsurance was more than doubled to EUR 430.6 million (EUR 151.2 million). Group net income increased sharply to EUR 305.6 million (EUR 164.1 million). Earnings per share stood at EUR 2.53 (EUR 1.36).

Promising business opportunities in life and health reinsurance

The general business environment in international life and health reinsurance remains favourable. Mature insurance markets such as the United Kingdom, United States and Germany as well as emerging markets in Asia – most notably China and Sharia-compliant retakaful business – continue to present attractive opportunities for profitable growth. "We are currently focusing our structures even more sharply on our growth markets", Mr. Wallin explained. "Thus, for example, by setting up our new 'Asia' business center we are concentrating the new business potential offered by Asian markets and hence aligning ourselves even more closely with the needs of our clients." In another move, with the creation of its "Longevity" business center Hannover Re is responding to the growing importance of pensions business.

Gross written premium totalled EUR 2.8 billion (EUR 2.5 billion) as at 30 June 2012. This is equivalent to growth of 12.4%, or 7.3% at constant exchange rates. Net premium earned climbed 9.7% to EUR 2.5 billion (EUR 2.3 billion); growth would have been 4.7% after adjustment for exchange rate effects.

The operating profit (EBIT) amounted to EUR 155.2 million (EUR 78.4 million), a reflection of the good quality and positive development of the book of life and health reinsurance. The EBIT margin stood at 6.2% (3.4%). Group net income for life and health reinsurance as at 30 June 2012 improved on the comparable six months by a substantial 73.1% to reach EUR 127.9 million (EUR 73.9 million). Earnings per share totalled EUR 1.06 (EUR 0.61).

Highly satisfactory investment income

Although capital markets continue to be under strain, Hannover Re is thoroughly satisfied with the development of its investments. The portfolio of investments under own management grew by a further 6.8% relative to the level as at 31 December 2011 to reach EUR 30.3 billion (EUR 28.3 billion). Net income from assets under own management climbed to EUR 553.2 million (EUR 511.5 million) as at 30 June 2012. The annualised average return on the investments under own management stood at a very pleasing 3.8% and thus exceeded the targeted return for the year of 3.5%. Ordinary investment income excluding interest on funds withheld and contract deposits totalled EUR 532.0 million, a figure well above that of the comparable period (EUR 447.9 million) despite the protracted low level of interest rates. Ordinary investment income was thus crucial in boosting the net income from investments under own management. Interest on funds withheld and contract deposits contracted slightly to EUR 156.3 million (EUR 161.3 million) owing to the sustained low interest rate level.

The unrealised gains on assets recognised at fair value through profit or loss, which are influenced primarily by changes in the value of the inflation swaps and ModCo derivatives, reverted to normal levels at the end of the first half-year after the very positive development in the first three months. Altogether, they amounted to EUR 2.9 million (EUR 53.7 million). Looked at on the basis of individual quarters, movements in unrealised gains and losses were highly volatile. While this item showed a gain of EUR 84.6 million in the first quarter, a loss of EUR 81.6 million was booked in the second quarter. The principal factors here were lower inflationary expectations as well as the widening of credit spreads on capital markets.

Including interest on funds withheld and contract deposits, Hannover Re generated net investment income of EUR 709.5 million (EUR 672.8 million).

Shareholders' equity further boosted

Hannover Re's equity base was further strengthened to EUR 5.5 billion (31 December 2011: EUR 5.0 billion). The total policyholders' surplus (including non-controlling interests and hybrid capital) grew by 6.7% to EUR 7.8 billion (EUR 7.3 billion). The book value per share rose 10.1% to EUR 45.37 (31 December 2011: EUR 41.22). The annualised return on equity improved from 9.9% to 15.5%.

Outlook

In view of the continuing attractive market opportunities in non-life and life/health reinsurance as well as the gratifying Group net income as at 30 June 2012, Hannover Re anticipates a good result for the full 2012 financial year. At unchanged exchange rates the company expects gross premium to grow by 5% to 7%.

Market conditions in non-life reinsurance continue to be highly promising. Following on from the favourable treaty renewals as at 1 April, it was for the most part possible to obtain further rate increases in the renewal round on 1 July. "In Australia and New Zealand we were again able to push through appreciable rate increases and improved conditions, as a consequence of which we slightly enlarged our overall premium volume here while reducing the exposure", Mr. Wallin noted. In North America no consistent market hardening could be observed. While rate rises of 5% to 10% were obtained for property catastrophe business, particularly vigorous increases of 20% to 30% were attainable for loss-impacted programmes in non-proportional property reinsurance. Rates and conditions for casualty business held stable. For 2012 Hannover Re is looking to grow its gross premium income from total non-life reinsurance by 5% to 7% after adjustment for exchange rate effects.

Prospects for life and health reinsurance similarly remain bright. In view of the broad range of business opportunities, Hannover Re anticipates organic growth of 5% to 7% in its gross premium volume for 2012.

Hannover Re stands by its targeted return on investment of 3.5% for the asset portfolio in 2012.

Based on the good business prospects overall in non-life and life/health reinsurance as well as its strategic orientation, Hannover Re is looking forward to a pleasing 2012 financial year. This is conditional on the burden of major losses not significantly exceeding the expected level of EUR 560 million for the full year and assumes that there are no drastic downturns on capital markets.

As for the dividend, Hannover Re continues to aim for a payout ratio in the range of 35% to 40% of its IFRS Group net income after tax.